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Many Unhappy Returns

Jan 1, 2007

It is not just a sweater that's too small or a duplicate blender that will be returned to a store after the holidays. Honest shoppers will be joined at the return counter by a growing number of increasingly sophisticated crooks.

Return fraud will cost stores $3.5 billion this holiday season alone, according to the National Retail Federation's latest survey. It was conducted among 90 retail executives. They expect 8.8 percent of holiday gifts to be returned, compared with an annual average of 7.3 percent returns.

"Retailers have often viewed lenient return policies as a cost of doing business with honest shoppers," says Joseph LaRocca, NRF vice president of loss prevention. "Unfortunately, due to an increase in return fraud, retailers are being forced to strike a delicate balance between servicing loyal shoppers and discouraging opportunistic criminals."

"Just one percent of all consumers are responsible for fraudulent or abusive return habits," says Mark Hilinski, vice president of sales and marketing for the Irvine, CA based Return Exchange, a provider of fraud protection solutions. Yet, "Return fraud and abuse costs retailers more than $16 billion a year," he notes, and describes several examples of such behavior.

"Wardrobing," also called "renting," refers to merchandise that is bought for short term use with the intent to return it. The practice, once most commonly associated with apparel, now encompasses all kinds of purchases, from fancy dresses to laptop computers. Retailers often can't resell the merchandise at face value and must either discount it or discard it.

This not only costs the retailer at the return end of the cycle. It also often depletes inventories of the most popular sizes, and impacts other high demand merchandise that customers might have wanted to buy.

It is the return of stolen merchandise, however, that is the most common form of return fraud, according to the NRF survey. A whopping 95.2 percent of retailers polled, reported this problem within the past year.

Hilinski describes two types of practice. One is from shoplifters who steal with the intention of returning products for full price. The other is a form of employee fraud, in which employees steal product and pass it on to someone else, who returns it for full price, or an employee who knowingly accepts returned stolen merchandise for full price.

Receipt fraud gained widespread publicity this year when a White House domestic policy advisor was caught. This person bought a slew of merchandise in order to get a legitimate receipt. He later returned to the store, put duplicates of the same merchandise in his shopping cart, and returned them for cash, using the previous receipt.

In another example, thieves buy an item and reproduce counterfeits of the receipt. They then go back and steal multiples of the original item and return them, using the counterfeit receipts.

Price switching is yet another example. Thieves put the tag or the bar code sticker for a low price product on a higher price one. They later take the low price tag or sticker off and return the item for its full, higher retail price.
In light of the growing incidences of return fraud, 69 percent of retailers polled said they have changed their return policies. Yet this holiday season, 70 percent will keep the same return policies they had for holiday 2005. One quarter of the retailers will tighten return policies this holiday season, and five percent will loosen them.

Strict return policies, such as short timeframes for returns or insistence upon a receipt, pose risks for retailers. Shoppers are more likely to take a chance on buying a gift if they know the recipient can return it if it's the wrong size, or otherwise unsuitable.

Ideally, the recipient will either buy something to replace the returned gift, or better, buy more. Yet according to Hilinski, "Good customers make a purchase after making a return only about four percent of the time. The other 96 percent of the time they leave the store with cash, credit or store credit."

Return policies are not a consumer's inherent right. "Returning merchandise," he says, "is a privilege granted by each retailer to its customers, and it differs according to each retailer's approach to the market. Depending on state laws, retailers are required to post their return policies, but they are not required to accept merchandise returns."

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